Fama-French model adds size and value factors to CAPM
Image: David Shankbone, CC BY 3.0, via Wikimedia Commons
Fama–French three-factor model
Fama-French model adds size and value factors to CAPM
The Fama-French three-factor model includes market excess return, small versus big company outperformance, and high versus low book/market value company outperformance. These factors extend beyond the market beta used in the CAPM model, providing a more comprehensive explanation of stock returns.
Example
A small-cap stock may outperform large-cap stocks, contributing to the small versus big company factor in the Fama-French model.
Understanding these additional factors helps investors better predict stock returns and manage portfolios more effectively.
Related concepts
Beta (finance)
Beta measures a stock's volatility relative to the market
Arbitrage pricing theory
APT uses multiple systematic risk factors; CAPM uses a single market index
the Capital Asset Pricing Model (CAPM) says
CAPM formula: Expected return = Rf + β(Rm - Rf)
Cronbach's alpha
Cronbach's alpha (α) measures internal consistency
Bias ratio
Bias ratio detects valuation bias in asset pricing
Capital asset pricing model
Treynor-Black model combines active stock picking with a passive market portfolio
Educational content, not financial advice.
One email a day: 5 concepts + the 5 stories that matter →
Swipe through 100 ML concepts daily
Open TickerNews